Bush To Push Saudi On Oil In Mideast Talks?

ENERGY MATTERS: Bush To Push Saudi On Oil In Mideast Talks? 1/8/2008 7:31:00 AM

NEW YORK (Dow Jones)--The last time U.S. President George Bush met face-to-face with Saudi Arabia's King Abdullah, crude oil prices were nearly half their current price and Saudi oil output was 5% higher than it is now.

Bush heads off Tuesday for a Middle East trip aimed at advancing efforts for a negotiated peace between Israeli and Palestinian leaders. After the Holy Land, he stops in Bahrain and Egypt and OPEC members Kuwait, the UAE and Saudi Arabia before returning to Washington on Jan. 16. Oil markets will be watching closely for signs on whether he leans on the Saudis to open the spigots.

The meeting with the leader of the world's biggest oil exporter - the first since the Saudi king came to Bush's Texas ranch in April 2005 - comes next week.

Despite crude oil prices reaching $100 a barrel in the U.S., the world's largest oil consumer, in recent days, energy issues are only one of several interlocking agenda items, along with the peace process, Iraq, Iran and, most likely, a major arms sale, analysts said.

Bush's national security advisor took 30 questions about the upcoming trip at a Jan. 3 press briefing: Not one was about oil.

Both the president and Saudi Arabia's oil minister, have sounded nonchalant about triple-digit crude prices in recent days, using similar language.

"Hundred-dollar oil is a reflection of supply and demand," Bush told Reuters in a Jan. 3 interview, though he did fret about people "paying a lot for gasoline." He alsorepeated his position that the U.S. emergency crude oil stockpile, the Strategic Petroleum Reserve, should be used only to quell supply crises, not high prices.

"The market decides the price of oil," Saudi Arabia's Oil Minister Ali Naimi said Sunday.

While the kingdom and its fellow OPEC members lost the power to dictate official crude oil selling prices 20 years ago with the advent of the futures market, production decisions greatly impact prices.

Bumpy Relationship

Since the last Bush-Abdullah meeting, the Organization of Petroleum Exporting Countries first cut output to shore up sliding oil prices and later boosted supplies.

But output from Saudi Arabia, now around 9 million barrels a day, is about 450,000 barrels a day lower than back in April 2005. The Saudis are planning to lift output capacity to about 12 million barrels a day by 2009, even as short-term plans to increase output of light crude by 500,000 barrels a day have been delayed by a few months into the first quarter of 2008.

Despite calls from U.S. Energy Secretary Samuel Bodman to boost output, OPEC decided to keep output steady at its December meeting and set its next gathering for Feb. 1. OPEC has said it believes current inventories and supplies are adequate, that speculators are driving up oil prices, and has expressed some concerns about the potential for an economic slowdown, or worse, in the U.S.

In the years since the last U.S.-Saudi summit, the oilrelationship has suffered some bumps and some high points. Bush upset the Saudis in his 2006 State of the Union address, calling for the replacement of "more than 75% of our oil imports from the Middle East by 2025." The Saudis, accounting for about 14% of U.S. crude imports, are the biggest Mideast oil supplier to the U.S.

Bush aides backtracked, emphasizing that it was the volume reductions, not specifically Saudi supplies, that ambitious targets for use of renewable fuels were targeting.

Elsewhere, the Saudis have given the green light for a $7 billion project to more than double the size of the Port Arthur, Texas refinery they run as a joint venture with Royal Dutch/Shell to 600,000 barrels a day, making it the biggest refinery in the U.S.

Industry analysts said they believe the Saudis would be more comfortable with a lower oil price, as it would be easier to digest for the global economy. The Saudis are thought to be willing to make available all the medium and heavy grade crudes requested by oil companies, but aren't expected to dramatically turn up the taps if buyers are absent.

Intertwined Issues

How much the issue of Saudi oil output becomes a matter of contention in the upcoming talks remains to be seen. The Saudis, who hold the bulk of OPEC's spare production capacity, have said in the past that high oil prices have been necessary to pay the high costs of fighting the war on terror. But $100 crude is clearly an undesirable region for both countries, maybe more so for the Saudis, analysts said.

"I think the White House is likely to maintain some ambiguity about whether or not he'll broach the matter of oil prices with the Saudis," said Antoine Halff, energy analyst at NewEdge Group in New York.

Halff said he doubts strongly "that it will be at the center of the conversations," noting that the federal Department of Energy's forecasts call for crude oil prices to fall back from historic highs this year.

"I think oil will take a back seat to Iran and the Israel-Palestinians, those issues being closely intertwined," Halff said. "If oil is at the center of conversations, it will be mostly inasmuch as what happens with Iran affects energy markets, whether directly or indirectly."

The U.S. has been pushing for tougher economic sanctions on Iran, as it fears the country would use its efforts to develop nuclear energy into nuclear weapons capabilities, which it would use to threaten Israel.

Iranian and U.S. forces faced off in an incident in the Strait of Hormuz, the vital Gulf oil shipping channel on Saturday, but oil markets shook off the matter on Monday. Extremely warm temperatures in the Northeast U.S. - the world's largest heating oil market - and fresh concerns about the unemployment rate, igniting fear that the U.S. may be heading into a recession, sent crude oil futures down nearly 3% to $95.09 a barrel.

Guns, Oil On Tap

Greg Priddy, analyst at the Eurasia Group in Washington, D.C., said he expects Bush will push the Saudis on oil output next week and a major U.S. arms sale to the Saudis also will be key to the discussions.

The Bush administration is expected to formally notify Congress on Jan. 15 - when the president is in the kingdom - of the $20 billion high technology arms sale that was agreed last autumn. "That sets in motion a 30-day period in which Congress can pass a resolution to block the sale. The timing of the event, given the controversy surrounding the arms deal, could also play into the decision making," Priddy said.

Source: David Bird, Dow Jones Newswires; 201-938-4423; david.bird@dowjones.com (David Bird is senior energy correspondent for Dow Jones Newswires).